Kurdish oil exports to Turkey only a matter of time

By bne IntelliNews January 23, 2014

David O'Byrne in Istanbul -

The long-running question of whether Turkey would allow the semi-autonomous Kurdistan region of Iraq to export its crude through Turkey's pipeline network appears to be close to receiving an answer - namely, that supplies will commence irrespective of whether an agreement is reached between the Kurdish Regional Government (KRG) and the Iraqi Central Government in Baghdad over the control of oil exports.

Turkish Energy Minister Taner Yildiz confirmed before Christmas that test flows of Kurdish crude had begun through the smaller of the two pipelines that makes up the Kirkuk-Ceyhan pipeline, with the larger line continuing to carry crude from the Baghdad-controlled fields around the KRG capital.

After Christmas, Yildiz confirmed that following successful tests crude is continuing to flow and was being stored in tanks at Ceyhan in Turkey, initially suggesting it would be held there until the KRG and Baghdad had concluded an agreement allowing for oil exports to start and on a formula for revenues to be divided.

With storage space at Ceyhan limited, analysts had concluded that exports from the Ceyhan terminal would begin during January even before the KRG announced that it was inviting bids from prospective buyers for 2m barrels, rising to 4m in February, 6m in March and rising to 10m-12m barrels for December. While those figures tally with previous announcements by Kurdish and Turkish officials that they expect exports from the region to plateau at around 300,000-400,000 b/d, no mention was made of any agreement with Baghdad.

Contrary to recent suggestions by both the KRG and Ankara that an agreement with Baghdad to allow crude exports to start should be little more than a formality, Baghdad's position appears to remain unchanged: that it alone holds the right to award contracts to exploit the Kurdistan region's mineral reserves and state oil marketing company SOMO alone has the right to sell the oil.

By contrast, the KRG continues to insist that Iraq's federal constitution does give it the right to award contracts and export, and all that remains is to conclude a formal agreement on revenue sharing with the central Iraqi government.

Predictably, Baghdad's reaction to the impending exports was not positive, with an official statement accusing Turkey of breaching the Iraq-Turkey pipeline agreement by attempting to undermine the Iraqi constitution. It warned that any companies buying the crude would face legal action for "smuggling", and threatened Turkey and the KRG with both legal action and unnamed "other measures".

Fait Accompli?

Whatever interpretation of the Iraqi constitution is correct, observers suggest that once Kurdish oil starts to be exported to Turkey, only the physical cutting of the pipeline will cause that to stop.

That, though, is a distinct possibility. Neither northern Iraq nor southeast Turkey can be described as particularly "secure". The Turkish section of the Kirkuk-Ceyhan line was damaged by sabotage attacks on over a dozen occasions in 2012, with suspicion falling on the Kurdish separatist group the Kurdistan Workers party (PKK), which operates from bases inside the KRG region, albeit without KRG support.

At the same time, Turkish Energy Minister Yildiz recently complained that the flow of Iraqi crude from Kirkuk had been halted on 112 occasions since last July - some of which at least can also be ascribed to sabotage by extremist Iraqi groups rebelling against Baghdad.

The risks, though, have not prevented those developers working in the region from continued investment. Genel Energy announced in mid-January that it would increase production from the Taq Taq field it operates, which is already flowing into the Kirkuk-Ceyhan line through a newly completed pipeline link, and also expects an increase in production from the Tawke field in which it holds a 25% stake. Gulf Keystone, which operates the Shaikan field, announced in January that it had started exports of heavy crude by truck through Turkey and plans to raise production to 100,000b/d.

Gas hopes

While the ramping up of Kurdish crude exports through Turkey will net Ankara a useful increase in transit fees as the supplies are routed on to Europe, arguably that alone is not worth the risk of increased regional tension and a possible war of attrition with Baghdad. That, though, is not Turkey's primary aim.

In addition to crude oil, the Kurdistan region holds enormous reserves of natural gas, which some estimates put as high as 2.83 trillion cubic metres, or roughly three-times that of Azerbaijan and of the recently discovered reserves in the East Mediterranean. And constructing a gas pipeline link to Turkey would be both simple and cheap.

Turkey's gas demand is set to exceed its limited gas import portfolio in the next two to three years and with prices of liquified natural gas (LNG) on the spot market sky high, Turkey urgently needs new supplies of gas to meet its rapidly growing demand for power, which cannot be met in time from other sources such as nuclear.

KRG Oil Minister Ashti Hawrami said in November that gas from the region could be made available to Turkey as early as 2017 - a date confirmed by Genel which in its January trading statement announced plans for exports to Turkey from two gasfields it is developing in the region of 4bn cm in 2017 rising to 10bn cm by 2020.

The arrival of Kurdish gas would be both timely and advantageous cost wise. With the region having no other possible markets except through Turkey, Ankara has ample scope to leverage a significant discount on the prices it pays its main suppliers of Russia and Iran - which would be good news for both Turkish consumers and Turkey's booming current account deficit, a large portion of which is due to expensive oil and gas imports.

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